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On the mountain, you learn to spot the crash before it happens. I spent my early 20s as a ski instructor in Whistler and saw hundreds of accidents: over cliffs, into trees, skis crossing, poles flailing. To do that job well, you need to master one thing: figuring out why someone will fall before they do.
Ski accidents almost always follow one of two patterns, both of which mirror two of the most common investor mistakes.
The first is an obvious one - skiing above your ability. Every year I was in Whistler, people died on the mountain, despite it having more than 40km of easy 'green' runs. And nine times out of ten it was a young, overconfident guy, trying to show off to his friends by skiing outside the boundaries or on hazardous terrain.
Warren Buffett says good investors stick to their 'circle of competence': 'What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know.'
You don't have to be an expert on every company to make a lot of money. You just need to find a few high-quality stocks that you understand well and then wait till they're offered to you at an attractive valuation.
As with skiing, the less complicated the terrain, the less likely you are to crash. Investing in Woolworths may not give you the same thrill as a Peruvian coal miner, but there's less room for error in your analysis. Sticking to businesses you understand will reduce the chances of making a mistake - just as avoiding double-black runs if you know you're a green run skier will save you a lot of broken bones.
The other way skiers crash is that they love - LOVE - to look down.
Every skier will occasionally feel out of control - it's just the nature of flying down a mountain with blades on your feet. When that out-of-control feeling hits, our natural instinct is to focus on what we fear. We look at the trees or the icy moguls right in front of us ... then head straight into them. Our legs follow our eyes. And when we look down, everything appears to be moving more quickly, which can cause us to lose balance or panic.
But when those rocky moments come, good skiers know to look up. To get out of difficult situations, you need to focus on where you want to go, not on what you fear. Force yourself to look further ahead and you'll automatically move in that direction; your legs make adjustments and you regain control.
Likewise, when a stock or the market is in free fall, don't focus on what you fear because it might cause you to sell irrationally in an effort to avoid a short-term loss. Watching daily share price movements is just as disorienting as watching the snow fly beneath your feet. Instead, look up, focus on the long term and make changes to your portfolio (if any) based on that.
Ideas can take several years to play out and the volatility in the meantime can be gut-wrenching. But, so long as your investment case remains intact, it usually pays to ride it out - not least because fees and taxes will bite into your return if you trade too much. 'The real money is made in the waiting' as Jesse Livermore put it.
Stay focused on the flat terrain ahead of you - a company's competitive advantages and the market's long-term returns. This will help you stay calm and make smarter choices. Keep within your circle of competence, turn away from fear and towards where you want to go; your legs and portfolio will thank you for it.